The picture is from a 1979 Popular mechanics....What's new for your car.
Here a explanation I found;
The knob at the helm is basically a vacuum pump. As long as the end of the tube/probe in the pan is submerged in oil, you can only pull the knob enough to see the green portion of the indicator. Once the oil level falls below the end of the probe, pulling the knob sucks air instead of fluid which allows the red portion of the indicator to appear alerting you that the oil level is low.
Pretty simple concept except for a couple of things; first I would not trust anything but the reading on the dipstick itself. Secondly, if any debris lodges itself in the capillary, it will give you a false reading. Since the blocked tube will act the same as being submerged in fluid by creating a vacuum when pulling the knob, one will think there is oil when in fact it may be empty. When I investigated the system I had to blow it out as it was full of debris from lying in the bilge. Lastly is the installation as I found in this particular case. I thought for the heck of it I would compare the length of the probe to the length of the OEM dipstick and the probe is actually longer! So in this particular install, the unit would only read empty long after there would be no indication on the dipstick itself. For it to work right, I'd prefer the end of the probe be close to the "ADD" mark on the dipstick so that the system would indicate ahead of time that you are LOW on oil not OUT of oil! Come to find out that the reason these were lying in the bilge is because the PO found out first hand that the reading was always wrong when compared with a dipstick. If left long enough, the oil level wouldn't even register on the stick but he was getting the thumbs up at the helm. All he had to do was cut the tube to the correct length and it would be fine.
I cleaned it all up and installed it to see if it worked, and sure enough it did. My buddy who owns the boat now is still deciding if he's going to keep the system or not. This was pretty cool...you learn something new every day!
And the link to the source. http://www.trojanboats.net/wforum/viewtopic.php?t=8049